Case of IRING Unlimited (70pts)

You have just been hired as a new management trainee by IRING Unlimited, a distributor of earrings
to various retail outlets located in shopping malls across the country. In the past, the company has done very
little in the way of budgeting and at certain times of the year has experienced a shortage of cash.
Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the
upcoming second quarter in order to show management the benefits that can be gained from an integrated
budgeting program. To this end, you have worked with accounting and other areas to gather the information
assembled below.
The company sells many styles of earrings, but all are sold for the same price—P10 per pair. Actual
sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of
earrings):
January (actual) . . . . . 20,000 June (budget) . . . . . . . . . 50,000
February (actual) . . . . 26,000 July (budget) . . . . . . . . . . 30,000
March (actual). . . . . . . 40,000 August (budget) . . . . . . . . 28,000
April (budget) . . . . . . . 65,000 September (budget). . . . . 25,000
May (budget). . . . . . . . 100,000

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should
be on hand at the end of each month to supply 40% of the earrings sold in the following month.
Suppliers are paid P4 for a pair of earrings. One-half of a month’s purchases is paid for in the month of
purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable
within 15 days. The company has found, however, that only 20% of a month’s sales are collected in the month
of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second
month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:

Variable:
Sales commissions . . . . . . 4% of sales
Fixed:
Advertising . . . . . . . . . . . . . P200,000
Rent . . . . . . . . . . . . . . . . . . P18,000
Salaries . . . . . . . . . . . . . . . P106,000
Utilities . . . . . . . . . . . . . . . . P7,000
Insurance. . . . . . . . . . . . . . P3,000
Depreciation. . . . . . . . . . . . P14,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase P16,000 in new equipment during May and P40,000 in new
equipment during June; both purchases will be for cash. The company declares dividends of P15,000 each
quarter, payable in the first month of the following quarter.
A listing of the company’s ledger accounts as of March 31 is given below:
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 74,000
Accounts receivable (P26,000 February sales;
P320,000 March sales). . . . . . . . . . . . . . . . . . . . . . . . 346,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,000
Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000
Property and equipment (net) . . . . . . . . . . . . . . . . . . . . 950,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,495,000

Liabilities and Stockholders’ Equity

Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 100,000
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580,000
Total liabilities and stockholders’ equity . . . . . . . . . . . . . P1,495,000

The company maintains a minimum cash balance of P50,000. All borrowing is done at the beginning of
a month; any repayments are made at the end of a month.
The company has an agreement with a bank that allows the company to borrow in increments of
P1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we
will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of
the accumulated interest on the loan and as much of the loan as possible (in increments of P1,000), while still
retaining at least P50,000 in cash.

Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
1. a. A sales budget, by month and in total. (10pts)
b. A schedule of expected cash collections from sales, by month and in total. (10pts)
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (10pts)
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. (10pts)
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to
maintain the minimum cash balance of P50,000. (10pts)
3. A budgeted income statement for the three-month period ending June 30. (10pts)
4. A budgeted balance sheet as of June 30. (10pts)